Rishi Sunak may have declared a victory, but the pandemic’s ill-effects are not over.
“Today’s figures show that our plan for jobs is working — saving people’s jobs and getting people back into work,” the chancellor said yesterday as official figures showed that another 182,000 people had moved into work in July and that the unemployment rate had fallen to 4.7 per cent.
Rishi Sunak can say with some comfort that the coronavirus job retention scheme has worked, in so far as that it has prevented a much bigger rise in unemployment, which probably has peaked at barely 1 per cent above where it was before the pandemic started. Indeed, some economists were forecasting rates of 12 per cent when Covid-19 emerged.
Yet the labour market has moved on considerably in recent months and the furlough scheme arguably is becoming more of a hindrance than a help. With vacancies soaring and people moving into work at a robust pace, employers are struggling to find staff. High rates of economic inactivity and the close to two million people still on furlough are not helping matters.
As the country emerged from lockdown, people flowed into work at a record pace. Two million people started a new job between April and June, 1.2 million of of whom were previously out of work. However, the unemployment rate is higher than it was before the pandemic and many of the people who remain on furlough are in sectors such as hospitality and health, where there are a large number of vacancies.
Ben Broadbent, a Bank of England deputy governor, said this month that furlough had reduced “effective supply in the economy by 2 per cent to 3 per cent” in the three months to June.
The supply of labour is also shrinking because rates of economic inactivity remain high. Some older workers have been taking retirement, rather than looking for new jobs, and more young people are staying in education rather than entering work. More than two million people are off work owing to long-term ill-health and the fall in the number of European Union migrant workers has compounded the problem. High levels of economic inactivity help to keep unemployment down as these workers are not in the labour market so cannot be counted as unemployed.
The end of furlough should ease some of these pressures. In areas such as health and social work, the number of vacancies far exceeds those on furlough, so those people should return to work. Yet there is a considerable mismatch in sectors such as manufacturing and retail, where there are not enough vacancies to cover the number of people on furlough. There will be a painful readjustment for some.
Redundancies will rise as the scheme ends, but there is a considerable amount of uncertainty over how pronounced the effect will be. At 3.6 per 1,000 employees, the redundancy rate between April and June fell to where it had been before the pandemic. Real-time data also suggests that redundancy notices were flat in July and August as the furlough scheme started to be scaled back.
Nye Cominetti, senior economist at the Resolution Foundation think tank, said that the latest labour market figures had provided “a clear and encouraging sign that the UK’s economic recovery is continuing, with high numbers of people returning to work, hiring at record levels and employment levels getting closer to where they were before the crisis began. However, policymakers must not become complacent about the recovery. With the furlough scheme ending at the end of next month, the UK jobs market is not yet in the clear.”